Episode 4 Introduction to Double Materiality
First of our three part subseries on Double materiality series
🌟 Welcome back, CSRD enthusiasts! 🌟
After a brief hiatus due to our website's rebranding journey, we're thrilled to be back with you, continuing our exploration of Corporate Sustainability Reporting Directive (CSRD). Our sincere apologies for the interruption, but we promise the wait will be worth it!
In this new article, we're going to simplify and explain the concept of "Double materiality" in CSRD. We'll use the idea of Financial materiality, which is something we've been using for a long time, to help explain it. Think of it like comparing our old, well-known financial systems to the still-growing sustainability ones.
Understanding Financial Materiality
Firstly, let's refresh our understanding of financial materiality. It refers to the significance of information within a company’s financial statements. This significance is gauged to determine whether a transaction, event, or piece of information is important enough to influence the decisions of users of the financial statements, such as investors or regulators.
For example, when Apple Inc. downgraded its revenue forecast by $9 billion in 2019 due to weaker than expected iPhone sales, particularly in China, it was a significant announcement. This figure was material because it represented a substantial percentage of Apple’s projected revenue for the quarter and led to a significant drop in Apple’s stock price.
Introducing Double Materiality in CSRD
Now, let's delve into the concept of double materiality as per the Corporate Sustainability Reporting Directive (CSRD). It mandates companies to assess and report on sustainability matters from two perspectives:
Financial Materiality (Outside-In): This perspective considers how sustainability issues may pose material risks or opportunities that could affect a company’s financial performance and position over time. It’s about understanding how environmental, social, and governance (ESG) factors impact the company financially.
Impact Materiality (Inside-Out): This perspective focuses on the actual or potential impacts of the company’s operations and value chain on people and the environment. It requires companies to consider both positive and negative consequences of their actions on society and the environment.
The CSRD requires companies to disclose information on sustainability matters that are material from either a financial or impact perspective, or both. This means that if an issue is significant from an environmental or social standpoint, it should be reported even if it may not have immediate financial implications, and vice versa.
Illustrating Double Materiality with Levi Strauss & Co.
To better grasp the concept, let's look at Levi Strauss & Co. (Levi’s), a fashion company actively involved in sustainability efforts:
Financial Materiality (Outside-In): Levi’s might evaluate the risk of water scarcity on its cotton supply chain. With cotton farming being water-intensive and climate change exacerbating water shortages, the availability and cost of cotton could significantly impact Levi’s profitability and stock performance.
Impact Materiality (Inside-Out): On the impact side, Levi’s assesses its Water<Less® initiative, aiming to reduce water usage in the denim finishing process. By implementing this initiative, Levi’s not only minimizes its environmental footprint but also addresses concerns of environmentally conscious consumers and stakeholders, reflecting its commitment to reducing its impact on water resources.
Conclusion
Double materiality is a crucial concept in CSRD as it broadens the scope of reporting beyond financial information to include the company’s sustainability impacts, risks, and opportunities. Through this lens, companies like Levi’s can provide comprehensive reports on how environmental factors affect their financial health and how their operations impact the environment, aligning with CSRD requirements for sustainability reporting.
As Double materiality is an essential concept deserving thorough exploration, we've laid the groundwork with this introduction today, setting the stage for a deeper dive in next week's installment. If you would like us to analyze the ESG reporting of a specific company / sector kindly let us know in comments. Until then, keep the ESG conversation going!
Stay tuned for more insights on CSRD and sustainability reporting!
Great breakdown of the materiality concept! Double materiality not only meets regulatory requirements but also offers companies a strategic advantage. By assessing both financial risks and their environmental and social impacts, companies can attract ESG-focused investors and drive long-term value.